President Donald Trump's trade tariffs continue to weigh on the outlook for growth and inflation, raising concerns over how long the Federal Reserve can stick with its planned cycle of interest rate cuts.
While the central bank moved forward with a 25-basis-point cut at the September meeting, the internal debate revealed that tariff-driven price pressures remain a key obstacle to bringing inflation back to the 2% target.
Most members agreed that the current trade policy is pushing inflation up—and may continue doing so through next year.
Inflation May Not Fall To 2% Until 2027
The Fed’s latest economic projections show inflation returning to the 2% target only in 2027. That's one year later than previously expected, and a clear signal that the central bank sees the current price pressures as more persistent.
“Inflation will not likely reach target until late 2027 which means these pressures are stickier and more persistent than anticipated several months ago,” commented Jeffrey Roach, Chief Economist for LPL Financial.
Most Fed participants acknowledged that the 2025 tariff hikes have raised inflation this year and would likely add more pressure next year. While some viewed these effects as less severe than initially feared, uncertainty remains high.
Several Fed members noted that business contacts plan to continue raising prices in response to higher input costs resulting from tariffs.
And although some officials suggested that gains in productivity could help offset the impact, others warned that progress toward the 2% inflation goal has effectively stalled.
“Some participants noted that business contacts had indicated that they would raise prices over time because of higher input costs stemming from tariff increases,” the Minutes said.
Governor Miran's Dissent: A Bigger Rate Cut Needed
Governor Stephen Miran was the only official to dissent in the September meeting, advocating for a 50-basis-point cut rather than 25.
He argued that labor market softness and underlying inflation closer to target warranted more aggressive easing.
Miran also said that structural changes—such as increased tariff revenue boosting national savings, and changes in immigration policy, which lower population growth—had reduced the neutral interest rate.
That's the rate where monetary policy neither stimulates nor restrains the economy.
Markets Still Expect More Cuts, But Fed Sees Risks Both Ways
Despite the Fed's cautious tone, futures markets still price in two more cuts before the end of 2025, according to Roach.
"Futures markets may turn out to be more accurate than the FOMC's collective projections, especially if inflation consistently declines in 2026," he said.
However, policymakers are walking a tightrope. They fear that easing too early could allow inflation expectations to rise again.
On the other hand, keeping rates too high for too long could trigger unnecessary job losses and a sharper economic slowdown.
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